ArcelorMittal SA (MT) 2015 Q1 法說會逐字稿

Good afternoon and good morning, everybody. This is Daniel Fairclough from ArcelorMittal Investor Relations. Thank you very much for joining us today on this conference call to discuss the first quarter 2015 results.

First, I'd like to remind you that this call is being recorded.

We will have a brief presentation from Mr. Mittal and Aditya, followed by a Q&A session. The idea is that the whole call should last about one hour. (Operator Instructions)

And so, with that, I will hand over the call to Mr. Mittal.

Thank you. Good day to everyone, and welcome to ArcelorMittal's first quarter 2015 results call. I am joined on this call today by all the members of the Group Management Board.

I will begin today's presentation with a brief overview of our first quarter 2015 results, followed by an update of our recent developments. I will then spend some time on the outlook for our markets before I turn the call over to Adit. He will go through the results in greater detail and provide an update on our guidance and targets for 2015.

As usual, I will start with health and safety. The loss time injury frequency rate in the first quarter was 0.88 times, versus 0.89 times in fourth quarter 2014 and 0.85 times in first quarter 2014. On the left-hand side of this slide, you may see the clear progress we have made over the past eight years. This demonstrates our commitment to this priority.

As a Company, we remain committed to the journey towards zero harm. We recently held our ninth annual health and safety day to reinforce this message and ensure that all levels of the organization are focused on this primary objective.

Turning to the first quarter highlights shown on slide number 4, it is clear that combined impact of lower iron ore prices and the challenging US market has resulted in lower EBITDA in the first quarter 2015. Our reported EBITDA of $1.4 billion does include $100 million provision for onerous contracts in the US.

Excluding this charge, steel-only EBITDA is essentially stable year on year. Clearly, we have been working hard to offset the various headwinds, including US and Brazil market challenges as well as negative translation effects.

Compared to the same quarter of 2014, we increased our steel shipments by 3%.

In mining, we increased our iron ore production by 5%, year-on-year basis. More importantly, we have reduced unit operating costs by 13% year on year.

While we have reported a net loss of $700 million in Q1 2015, this is largely the result of foreign exchange impacts on the value of deferred [taxes].

A better reflection of our performance, I believe, is the ongoing progress on net debt. As expected, there was a seasonal investment in working capital in the first quarter. So, net debt increased to $16.6 billion, comparing with the Quarter 4. But if I compare net debt to where it was 12 months ago, I can see a decline of almost $2 billion.

Moving on to the next slide, I want to spend a few more minutes on the performance of our steel and mining business. The standout segment is again Europe, where we continue to make good progress. EBITDA per tonne increased by 9% in the first quarter, reflecting further improved market conditions as well as the results of our cost optimization efforts. In local currency terms, the improvement is even more pronounced.

I remain encouraged by the results of our ACIS segment. Despite the market impact of political instability in Ukraine, EBITDA per tonne was higher than year-ago levels, showing good progress on operational improvement.

Looking at Brazil performance, market conditions have been challenging for some time, and they remain so in the first quarter. [Rolled] margins have been squeezed due to the lower realized selling prices, impacted by weaker Brazilian reais and aggressive competition in export slab markets, offset in part by higher steel shipments following the restart of the third blast furnace in Tubarao in July 2014.

Results for our NAFTA business have been hampered by the exceptional market conditions in the US. Following a period of unusually high imports, apparent demand in the first quarter was very weak and domestic prices have collapsed. Our NAFTA performance was further impacted by inventory write-downs at the end of the quarter.

As a result, while business conditions are expected to remain very challenging in the second quarter, NAFTA performance should not deteriorate further.

Our mining segment profitability has clearly been impacted by the drop in iron ore prices. However, cost performance has been good, and I want to discuss in some more detail.

As mentioned, iron ore prices have declined by 48% over the past 12 months. We cannot do anything about this. What we can do, though, is focus on our [mining] cost base. We reduced cash costs by 13% as compared to the same period of 2014. Approximately half of this improvement reflects operational improvements, including de-bottlenecking benefits at Mines Canada as well as efficiency and procurement savings.

Our performance at Mines Canada is particularly notable. Following the expansion, this is now a world-class operation. We expect concentrate cash costs in 2015 to be almost 40% lower than in 2013. This is a great achievement and very important in the context of the new iron ore price reality.

I expect further improvement during the remainder of 2015. I said at the start of the year that unit iron ore costs would decline by 10% in 2015. I now expect them to fall by at least 15% in 2015.

On slide 7, I will discuss the topic of CapEx. As you know, beyond what is essential to maintain the business, our CapEx has been very selective. We have and will continue to invest to support our franchise steel businesses, in particular automotive.

That said, due to the benefits of ForEx and the postponement of some smaller investment projects, our CapEx spend for the year 2015 is now expected to be approximately $3 billion. This is below the previous guidance of $3.4 billion and represents a decline of approximately 18% versus 2014.

Lower CapEx, together with our focus on working capital efficiency and benefits of lower net interest costs, are all improving our ability to convert EBITDA into free cash flow.

Next slide, I will discuss market outlook. As you can see on the chart on the right-hand side of this slide, the ArcelorMittal shipment-weighted global PMI has slowed over the past few months, largely due to moderating growth in the US. But importantly, it has been consistently above the critical 50 level, indicating continued growth in demand for our steel. Our weighted global PMI for the month of April is around 52.

Real underlying demand continues to grow across our key developed markets. The US has been impacted by the weakening of energy investments and the strength of US dollar, although it is worth to note that underlying real demand continues to grow, particularly in the auto and machinery sectors, offsetting weakness in the energy sector.

Moving to Europe, manufacturing is benefiting from rising consumer demand, boosted by cheaper oil and easier credit, while the weaker euro is supporting exports. We remain confident that underlying real demand will increase, [really accelerate], buoyed by the recent strength of auto sales and a rebound in business confidence which will support future investment.

Chinese industrial indicators point to further de-acceleration. The realistic correction will continue to dampen activity over the coming months, and despite the growth in [percentage of car] assembly and in infrastructure, we expect a small decline in underlying real demand. However, due to the strength of destocking last year, apparent demand is expected to grow this year, with the stimulus measures supporting growth in 2016.

The outlook for Brazil has deteriorated, impacted by a weak consumer, government spending cuts, and rising interest rates leading to declining real steel demand.

As expected, lower oil prices and financial sanctions are negatively impacting Russia, albeit the risk of a more [serious situation] has moderated somewhat by a recent uptick in both the ruble and oil prices.

Now, on slide 9, I want to highlight our forecast for apparent consumption growth in our key regions. After all, it is apparent, rather than underlying demand, that will drive our shipments in 2015.

Starting with the US, despite rising real demand due to significant restocking in 2014 caused by the strength of imports, we expect apparent demand to decline in 2015. Despite this decline, steel demand remains within 5% of 2007 levels.

In Europe, I expect the continued real underlying demand to translate into further positive apparent demand growth in 2015, within a range of 1.5% up to 2.5%.

In Brazil, we now expect apparent consumption to decline again in 2015, as the economy reenters recession.

On a global basis, we forecast apparent steel consumption to increase by approximately plus 0.5% up to 1.5% this year.

Given the Company's specific geographical and end market exposures, we expect ArcelorMittal shipments to increase between 3% and 5% in 2015. Approximately half of the increase will be as a result of the completion of the Newcastle reline in South Africa, as well as the full-year impact of the restart of blast furnace number 3 in Tubarao, Brazil.

With this, I hand over the call to Adit, who will discuss the first quarter 2015 financial results and guidance.

Thank you and good afternoon and good morning to everybody.

I'm on slide 11. Here, we show the EBITDA progression from Q4 2014 to Q1 2015. On an underlying basis, we have an EBITDA decline of about 20%, which reflects weaker performance in both our steel and mining businesses.

In steel, the positive contribution from higher shipment volumes is more than offset by weaker pricing. Shipments increased by just under 11% in Europe, reflecting seasonal factors and improved demand, but this was partially offset by reduced shipments in the other steel segments.

There was a significant price-cost squeeze in steel during the quarter, reflecting price declines in all segments, most notably the US.

In mining, EBITDA was negatively impacted by a seasonal decline in shipment volumes, particularly in Mines Canada. The impact from declining iron ore prices was only partially offset through improved cost performance.

Moving along the bridge, you can see a negative $125 million impact from others. This largely represents translation losses following the strengthening of the US dollar, which is primarily euro and real related.

Moving to slide 12, which shows our P&L bridge from EBITDA to net loss. We will focus on the chart in the upper half of the slide, which shows the bridge for this quarter.

Depreciation was lower, at $0.8 billion, compared to $1 billion in Q4 2014. This is primarily due to foreign exchange impacts following the depreciation against the US dollar of all major currencies: Brazilian real, euro, as well as the Canadian dollar. Assuming exchange rates remain around current levels, then you should anticipate full-year depreciation of approximately $3.5 billion.

Moving to loss from investments, associates, and joint ventures, in Q1 our share of losses was $2 million, as compared with losses of $380 million in Q4. The big difference here, if you remember, is that Q4 2014 was negatively impacted by impairment by China Oriental, partially offset by gains recorded on the sale of Gallatin.

Net interest remained stable in Q1, as compared to Q4.

Foreign exchange and other net financing costs in Q1 was negative $756 million, as compared to $549 million for Q4. This increase largely relates to the impact of the US dollar appreciation on the value of our euro-denominated deferred tax assets, partially offset by foreign exchange gains on the euro debt. This is in line with our ForEx model and sensitivity exchange rate movements that we provided at our Q4 2014 results.

These largely non-cash FX-related charges resulted in a reported pretax loss of $510 million this quarter.

Next, we turn to the waterfall, taking us from EBITDA to free cash flow. During Q1, we had a $1.2 billion investment in operating working capital. This is a normal seasonal effect. I should highlight here the difference between the balance sheet and cash flow impacts. On the balance sheet, working capital is largely unchanged, but this is due to FX impacts, while rotation days increased to 54, from 51 days in Q4 2014.

The third bar shows the combined impact of net financial cost, tax expenses, reversal of non-cash items such as unrealized ForEx, as well as the payment of other payables such as employee benefits, VAT -- totaling $1.1 billion.

Negative cash flow from operations of $915 million combined with CapEx of $745 million resulted in negative free cash flow this quarter of $1.7 billion.

On slide 14, I want to touch on our overall balance sheet position. At the end of Q1, we had a strong liquidity position of $8.8 billion at the end of March, consisting of $2.8 billion in cash and $6 billion in unused bank lines.

I'm pleased to confirm that last week we closed the refinancing and extension of our $6 billion lines of credit. These are two tranches, the first of which now matures three years from now. These were oversubscribed and come at an even lower margin.

I'd also highlight that the covenant on these lines of credits is 4.25 reported net debt to last 12 months of EBITDA. The ratio at the end of Q1 was 2.4 times.

Moving to net debt, while net debt did increase sequentially during Q1, this was due to seasonal working capital investments. I think the bigger take-away this year is the year-on-year decline of almost $2 billion in net debt. Gross debt is also $4.2 billion lower year on year.

Furthermore, we expect to make progress in terms of achieving our net debt target of $15 billion this year, and we expect to be free cash flow positive in 2015.

Finally, let me now talk about our guidance and targets for 2015. While steel markets have evolved largely as per expectations, the subsequent deterioration of iron ore prices as well as a weaker US market results in a headwind to earlier guidance.

Although the Company expects to benefit from further improvement in costs, both in mining and steel segments, including lower raw material costs, the Company now expects 2015 EBITDA within the range of $6 billion to $7 billion.

We mentioned earlier that capital expenditure budget for 2015 has been further reduced, to $3 billion.

Lastly, even at the lower end of this new EBITDA guidance range, we continue to expect to be positive free cash flow in 2015 and to achieve progress towards the medium-term net debt target of $15 billion during the course of the year.

That concludes our presentation, and now we'd be happy to answer your questions.

Thank you very much. (Operator Instructions) WE do have a nice queue already. So, we will take the first question from Mike, at Credit Suisse, please.

My two questions, if I may? The first, I think if you look at -- where you probably had some of the highest structural challenges a few years ago was Europe, and you went through, I think, a pretty major restructuring of the European operations, including some capacity closure. And I think you're now reaping the dividends of that, in that Europe almost consistently seems to surprise on the upside with good numbers.

I guess, structurally, your two most challenging areas at the moment include backward integration and strong currencies, which is the US on one hand and Kazakhstan on the other. And I know, clearly, there's a destock going on in the US which is cyclical. But structurally, I guess you can't rely on a much weaker dollar and you can't rely on raw material prices rising again materially.

So, have you got any plans to attack EBITDA margins, costs, in both the US and Kazakhstan, more aggressively than you're doing?

My second question is just on US anti-dumping, where there's clearly a lot of noise at the moment. Can you give us any sort of view you have on an update for that? And I guess the question is, is it actually the answer? Because when you go back to 2002 and look at Section 201, or if you look at the OCTG anti-dumping on China in 2009, neither really worked. The US 201 action caused a flow backwards. Then, it flowed back into the US two months later and caused prices to fall. And the US anti-dumping on OCTG just simply led to replacement of OCTG imports coming in from elsewhere.

So, is it the answer? And if not, what is the answer? Because, really, the problem is preventing exports as opposed to preventing imports, I think is the problem.

Lou?

Just to comment on the US and structural opportunities along the lines of the asset optimization program that we implemented in Europe over a sustained period and that, as you indicated, is showing very improved now. I think as we mentioned on the last call, this is something we have been looking at, I would say, quite deeply in the US and discussing quite extensively. And obviously, the downturn in the market is something that increases the urgency of that.

So, I think we are, again, looking very carefully and deeply at that. We know what to do, as we mentioned on the last call. I think we certainly have very significant opportunities in terms of rationalizing our finishing assets.

We're committed both to being highly cost competitive in our operations and to maintaining our market position, and we think we can get there, that an asset restructuring plan in the US is going to be part of the answer there. We're not quite ready to announce that. I think when we're ready, though, certainly we'll bring that information to the market

[Please], comment on anti-dumping.

On the trade front, I think you're --. I'm not sure that I, at least personally, would agree with you that these cases and initiatives have as limited an impact as you indicate, although I think the idea that they're the solution is also overstated.

I think in terms of the way we look at things -- and this takes us back to the US question that I just tried to answer previously -- clearly, we're not counting on any trade actions providing any material benefits. This is something we need to improve, the results, on our own. And anything that happens on the trade front that's positive is just icing on the cake, if you will.

But I think we don't comment on specific trade cases or potential trade cases in public forums, but I think we do have an unprecedented surge in imports into the US market and NAFTA markets, generally. And it's clear that they are a part of what's causing significant harm to the domestic industry.

And I think it's appropriate that NAFTA producers protect themselves from the unfair actions of foreign producers trying to export their excess capacity to NAFTA. And as the largest steel producer in NAFTA, as well as the largest globally, we actively support in all the markets where we operate efforts to ensure fair trade in steel.

So, I think we're supportive of those efforts that the US industry is undertaking and generally supportive, I would say. But again, we recognize that we've got to improve the results based on our own initiatives and actions with our assets and our positions with our customers.

Okay. That's very clear. So, just throw that back over to Kazakhstan and, I guess, the CIS in general, in terms of similar plans for maybe more aggressive restructuring?

I think, Mike, you are very right when you point out that in the face of these headwinds, costs appear to be the only alternative left, and that's precisely what we are focused on.

And one thing, of course, which we have been doing now for some time is to focus on the operational stability and our maintenance practices. And that, of course, underwrites then good cost position. That's one thing.

And energy is another very important component of costs in Kazakhstan. We are closely looking at that and we have made some good dents there. Fixed costs, captive mines. Thought they are captive, but still they lend themselves well to any cost reduction.

And then, of course, to keep up with the competition, we must look at our mining costs also. There is a great focus on that.

And then, there are other areas like [purchasing] and service contracts. We will do a close review of these things.

Overall, we are very happy with the developments on the costs in Kazakhstan. Since January, we are seeing very good developments happening.

So, you are very right in asking this question. Cost is the focus there.

And as Lou alluded to it in some ways, you're not in a position yet to announce anything, but is it something that you would package together as a Group and potentially announce, just to help the market out in terms of how we could see your plans for Group cost reduction accelerating over time?

Michael, I think we don't have any plans to announce a Group-wide AOP like we did almost four years ago. I think we find that it's more beneficial to us and the market and the shareholders in the long run if we focus on the management gains and highlight the opportunities we have to drive further costs.

The danger of doing these things on a global basis is we also alert the competition to our plans, and that is not in our interests.

So, just to underline the responses, clearly, in Kazakhstan we're focused on cost reduction. And in the US, apart from costs, we have opportunities to optimize the asset base.

Okay. Very clear answers.

Great. So, we'll [lead] to the next question, from Mike Flitton at Citigroup, please.

I had just two around the run rates, especially around NAFTA and then for the Group. I was wondering if you can just give us a bit more color on how you feel NAFTA will develop? And obviously, you're probably going to continue to have prices weaken over the next quarter, given the contract delays. I was wondering if you could say, do you expect Q2 to be below Q1?

And just in terms of the second-half recovery in NAFTA, how much are you, I guess, looking for a restock in the second half, as opposed to just the destocking abating? That's the first question.

And then, in terms of the Group, how much of the guidance for the full year is dependent on that NAFTA second-half recovery? And obviously, you would expect the rest of the Group and 80% of EBITDA to fall away seasonally in the second half. So, if you can give us a bit more color on how they would interact and how you see a Group second-half recovery for the rest of the business, as well?

I think to start on the NAFTA trajectory, let's say, I think you're right to say that this is really a first-half phenomenon for us. So, I think that you're seeing that destocking.

We have, I think, some indications that our expectation that this was just an inventory adjustment -- even if a particularly sharp and drastic one -- and that we'd be seeing the end of that by, kind of, May to June. I don't want to declare with certainty that that's the case here, but I think we are seeing lead times extend out.

We have idled one furnace that we were going to work on this summer. It's a relatively small one at our Indiana Harbor facility. So, that's idled indefinitely now. We will do that work this summer. But we're ready to bring it back if the market supports it.

But if we take that bit of capacity out, our order book is now relatively full for Q2. I think the lead times have moved out, as we understand from our customers, to four to five weeks in spot markets. And a month ago, I would say, they were typically one to two weeks.

So, I think customers are coming back into the market. Again, we're --. I wouldn't say things -- a boom is here, but I think we are seeing the end of that destocking process.

As you may know, we announced a price increase about a week ago, or so, and I think we did that only thinking that the supply and demand conditions did warrant that. And we'll see how that plays out, but I think the early indications are that, in fact, that instinct was correct.

But nevertheless, given the structure of some of our contracts, the lag, and some of the index contracts -- which is, let's say, 15%, or so, of our business -- we are going to see that impact of the price [drop] carry through the second quarter.

But I do think we look -- if we take Mr. Mittal's, the numbers he gave overall for the market, the real growth versus the apparent decline, just if you work through the arithmetic, that apparent decline, I think, has basically occurred more or less already.

So, I think we'd see that we see some -- no further decline. Whether we see the uptick there, I think that we're not counting on that. As you say, there's some seasonal negatives for us into the second half.

But I think that inventory adjustment, which was very sharp, very drastic, I think that's going to play out to be largely behind us, and we'll now see the underlying strength of the US economy come back and show up in our markets and in our results.

But again, I think it's more of a second-half phenomenon, and we'll still see some overhang of this structural adjustment in the second quarter.

Let me talk about the specifics of Q1 reported EBITDA versus Q2, and then talk to you about guidance. In Q1, we took an onerous contract charge of $69 million, as well as an inventory write-down based on an NRV provision. So, therefore, on a reported basis, those charges will not be there in Q2 versus Q1.

And Q2 EBITDA for NAFTA will be higher than Q1. So, when I say "higher," I'm not saying higher than the reported number. I'm saying higher if you add back --. If you add the Q1 reported number plus the $69 million onerous contract charge, we would expect that Q2 NAFTA EBITDA would be higher than that figure.

In terms of the guidance, the guidance has a range of $6 billion to $7 billion, and I'll talk in terms of the range because I think that best answers your question.

The lower end of the range assumes that iron ore pricing is where it was at the end of Q1, which is about $48. It assumes that US conditions, apart from volume, do not change compared to where they are in the first half of this year.

It also incorporates the fact that Calvert will do better in the second half compared to the first half, because in Calvert we have in inventory higher-cost slabs because the slabs are based on HRC pricing, and as that pricing has come down, we are carrying expensive slabs in Calvert.

It also incorporates the fact that we're making good progress in terms of cost performance, as well as we expect a volume growth in Mines Canada -- that's in the mining EBITDA-- and also a seasonal improvement in volumes. Some of this is in NAFTA that we talked about, because the destock is coming to a close. Calvert should do better, as well. But also ACIS, where Q1 is usually weak because of the winter months, and ACIS should perform better in the next three quarters.

Plus, the cost reduction of raw materials to inventory and on a global basis, and there will be some benefits of that in the forthcoming quarters.

What it does not incorporate in the range -- or, the upside of the range is that iron ore pricing is higher than the end of Q1. If you look at where iron ore is trading today, it clearly is higher than $48.

It does not anticipate even stronger pricing in the US market, the bottom end. But clearly, the upper end of the range would incorporate a stronger return to fundamentals in the US market, as well as better pricing of steel markets globally.

I think if we look at Chinese data of exports, China was exporting 120 million tonnes of steel in January, and when we come to March the level is closer to 90 million, which is the same average of 2014.

And also the trade action which was discussed earlier on the call.

So, that would be on the upside of our guidance range.

Thank you. And just quickly, how does Brazil fit into that, in terms of the Group? I'm just wondering how much visibility you guys have down there? Obviously, there's macro headwinds that you've historically managed to outperform those, certainly in terms of a volume basis. And I'm just wondering how you think that will develop over the year?

If you look at Brazil, if you look at Q1 performance in Brazil, I think the biggest impacts have been twofold. One has been our tubular business, which has not performed -- or seasonally is weaker in Q1 compared to Q4. And that has a big impact, because there is a big tubular component in our Brazil segment. And the second has been that domestic volumes are lower.

Nevertheless, relative to the macro situation, margins are holding in Brazil, and we expect that to be the case for 2015. So, the low end of our guidance range assumes no improvement in apparent steel consumption in Brazil (i.e., matching our forecasts). Margins remain where they are. The upper end of the guidance would obviously be an improvement in the Brazilian macro story.

Very helpful.

Great. We'll take the next question from Bastian, at Deutsche Bank, please.

I've got two questions. My first question is again on (inaudible), where I would like to dig a little bit deeper. As you said, you took some inventory impairments on the finished goods and [simis], and you obviously keep a few million tons in stock. So, I guess the effect could have been quite material. How much has that been? You quantified the effect of the onerous contracts. So, maybe you can give us some quantitative guidance here, as well, as it could change the starting point for your second quarter, obviously, quite materially.

And then, my second question is on the others line. Could you give us some more color here what was driving the better performance for others, which is typically a negative EBITDA contributor? That would be very helpful.

The others lines is an $85 million increment in Q1, and others represents insurance activities. So, our reinsurance activities. It represents freight, as well as the sale of real estate. So, it's our land sales, as well. Compared to Q4, I expect that trend to not continue. So, I expect the others line to not have the same positive $85 million for the next three quarters of the year.

In terms of the inventory write-down, I don't want to give a specific number, but what I would suggest to you that it is larger than the onerous contract provision of $69 million. And so, it's in the low three-digit millions of dollars number.

Okay. That's very helpful.

Great. We'll take the next question then from Tim, at RBC, please.

The one question on the guidance range has been answered. So, thank you for that.

Also, you in your commentary on depreciation gave a comp on the first quarter number versus what you'd expect for the full year at a constant FX. Is it possible to get that for your FX and other -- or, at least the $538 million portion of that -- at a constant-euro rate for the end of the year? Have you guys figured out approximately what impact that would have for the full year 2015?

The FX is based on changes. So, to the extent that there is no change from the end of Q1, there would be no impact. And then, it would be a normal $200 million cost that we run due to pension and other bank fees.

The model that we had shared with the analyst community -- and I'm sure you can spend more time with Daniel and Hetal to go through -- was on a very simple thumb rule that a 1% depreciation of the euro would be a $35 million charge and a 1% depreciation of the Brazilian real would be a $7 million charge.

And so, if you look at the rates and the way the rates have moved, I believe the euro has moved on a balance sheet basis by 10% to 11%, and that's about $350 million. And the Brazilian real on a balance sheet basis has moved by 17%, and that's another $150 million. And when you add that up, you get to the ForEx charge that we had in Q1.

Does that answer the --?

That's great.

Okay. Great.

Okay. We will take the next question from Jeff, at Macquarie, please.

My two questions were more to do on the mining side. If you look at the revised cost reduction guidance, the 15% reduction, can you give a breakdown as to the main drivers of that, in terms of, say, what portion from FX, what portion from, say, self-help, and what portion maybe from just lower cost for consumables like diesel?

Bill?

Okay, Jeff. When you look at the cost reduction, I'd say about 45%, 40% is from the exchange rate and fuel effects; 55%, 60% is on OpEx and costs. There's a variety of drivers of that.

I've spoken before about the procurement initiatives we're taking. That's a material part of that.

Volume through Canada is another driver of that. If you think year on year, we're up 18% in the volume from Canada. That supports that.

We've had the ongoing program on maintenance which is bearing fruit. That's improving the reliability, which reduces some of the unplanned outages, which also impacts costs.

FTE productivity benefits are also a small part of that.

And also, SGA and fixed costs, which at a corporate level for mining are down 20% year on year.

So, there's a variety of levers behind that.

On the procurement, the benefits from the global categories. So, whether it's explosives, fires, heavy mobile equipment, the benefits of that program over the last 18 months are coming through as we renegotiate contracts in different parts of the world.

So, there's a whole variety of levers there.

Okay. That's helpful. My second question is, earlier in the year you had talked about maybe revisiting the scope of the Liberia Phase II project. And obviously, we haven't had an announcement. It just remains suspended.

To what extent the weakness we saw, with iron ore pushing towards $45 a tonne, maybe forces you to revisit that whole expansion? It almost seems like a double-edged sword here, where given the low Fe grades I would imagine that prices below $50 a tonne for benchmark, that operation is really suffering? But on the other hand, do you really want to commit capital to try and upgrade the product?

Jeff, I think that's a little bit the dilemma. As you know, with the ebola, it's suspended. Since then, we all know what's happened to the iron ore price.

We're continuing to look at this. There's various ways to think about how you might proceed at different rates. The key is to try to think about how you'd upgrade the product.

So, the team are continually assessing different ways to do that at different times and different rates. We'll keep doing that. And when we settle on some conclusions, of course we'll come back to the market.

Phase I is continuing, the DSO. Clearly, the issue there is not cost; it's more the product quality. So, we work on the mine plan, and we're trying to differentiate the product and target the markets, which is in line with our broader marketing approach anyway.

And that's what we're focusing on in Liberia at this point in time.

Okay. Just to follow up on the DSO product, can you give a price as to what's necessary to break even there?

No. It's not something we'd communicate on an asset-by-asset basis. It's clearly marginal at this point in time. But as I've said, we're working on the mine plan and the products to improve realization for the product. And of course, a lot of effort on costs.

Okay. Great.

Thanks, Jeff. We'll take the next question from Carsten, at UBS, please.

My first question also comes with regard to the mining business. We have seen quite a bit of optimization programs in steel, closures of sites, et cetera. Could we expect something similar in mining, given where the raw material prices are? And do you see potential here for actually getting profitability back on track for the mining business? That's the first one.

And the second one is rather on the dividend policy. We have seen for a few years now that net income was actually negative. Could that at some point influence your dividend strategy? Because you're still paying $0.20 per share. Might you suspend that temporarily?

Okay, Carsten. I think in terms of restructuring, of course at the end of last year we had the Kuzbass sale. And then, also during the course of last year, on the coal side we made some adjustments to the footprint in Princeton to focus on a new above-ground mine and reduce the underground.

I think when we look at the current pricing or the pricing around the end of Q3, with the program we've got in place on the growth in Canada of the volumes, the cost reduction that we're doing, we expect to be free cash flow neutral at these levels across the portfolio.

The real focus is on the costs. We've had a good Q1 behind that. That's why we've increased the guidance to 15% for the rest of the year.

Okay. So, there's no immediate action on any closures for you guys because the costs are low enough?

No. The only other one is in Brazil, where we take a more opportunistic view as to whether we can put some of the center feed on the market or not, depending on pricing. Otherwise, we focus it more internally.

Okay.

Okay, Carsten. Your question on dividend and then income. I think it's important to recognize that even if you looked at 2014, if you excluded the non-cash impairment charges and non-cash one-offs, we were positive on a net income basis. And if you'll do the same work going back a few years, you would realize that largely we are net income negative primarily due to the impairment charges. And even the ForEx in Q1, for example, is non-cash and that's a big amount; it's $539 million.

Okay. So, you actually -- we can expect that you keep the dividend then?

Yes.

Perfect.

Thanks, Carsten. We'll take the next question from Seth, at Jefferies, please.

Seth Rosenfeld, at Jefferies. Just a couple of questions, looking specifically at the European market. I was wondering if you can just comment on the current level of inventories across Europe and how you've seen that move over the last couple of months? Obviously, demand has gradually recovered.

And then, secondly, on import pressure within Europe, where are the greatest import pressures coming from at present? I think you had commented in the past that you had had close eye on Russian volumes, but they had yet to materialize as of the last time you commented publicly. Where does that stand at present with those exports from Russia within Europe?

Let me just quickly address the European market. In terms of inventory environment, there is no significant increase or change in the level of inventories in Europe. So, there is no restock or a destock which we're seeing in some other markets.

If you look at 2014, there was a small increase in inventories towards the end, and in 2015 we expect that level to be maintained. So, we're not forecasting a destock.

In terms of imports, there has been a slight increase of imports as well in Europe, not to the same degree that we see in the US. I think, clearly, Europe is supported by the fact that, because there is a weakening euro, the attractiveness of imports into Europe is also declining. Europe is also becoming more competitive on an export basis.

There is more increase of Russian exports into east Europe, but not the surge type that we have seen in the US. Clearly, even in Europe, we are vigilant and we are ensuring that in Brussels, associations like EUROFER are ensuring that a fair trade, level playing field is maintained. And we at ArcelorMittal are supportive of those efforts.

Great.

Great. We'll take the next question from Cedar, at Merrill Lynch, please.

One question on the European business. You saw an 11% increase in shipments quarter on quarter, and EBITDA obviously rose by a commensurate amount. But if we look at EBITDA per tonne in the European business, we haven't seen any improvement, despite the fact that there are significant amount of cost savings that have been put through and also the fact that higher shipments should theoretically translate into better fixed cost absorption per ton.

I appreciate that some of the flat EBITDA per tonne can be attributed to an FX translation issue. But can you just talk about what pricing power you're actually seeing in the European market as volumes rise? Because I think we're all trying to get excited about the uptick in the potential margin in the European market, but it doesn't seem to be coming through in Q1. What can you talk about, going forward?

Cedar, we should be careful when we look at it on a per-tonne basis. The numbers I have at least show that year-on-year there has been an improvement. And you're right, Q4 to Q1, it's constant.

And the one reason why I say we have to be careful is because the fixed costs absorption benefit is coming on the incremental tonnes. And that doesn't necessarily have the same -- when you spread it over the tonnes, the profit is rising and that's where you see the benefit. So, when you do a bridge, you will not do the bridge on a per-tonne basis having the fixed cost benefit, but on the whole EBITDA. But let's put that issue aside and we can talk about that later.

I think the key point in Europe is two-fold. Number one, the translation impact is significant; it's about $51 million. So, on a euro basis, the increase is greater. And number two, I think on the margin there is an inventory lag in Europe, as well. So, when you look at the cost of our inventory, it is higher than where the spot pricing is.

So, I think what people are suggesting or what may be an upside to our guidance is if we get the full benefit of the fact that raw material costs have come down and prices remain where they are, then there should be an increase in margin in Europe, as well.

The third thing I would say is that the impact of raw materials is also not as pronounced in Europe, because clearly the euro has weakened and all the raw material pricing is in dollars.

In terms of that raw material benefit, is that something that should start to come through in Q2?

Yes, Q2 normally is -- Q2 should be stronger for Europe. And in terms of raw material benefits, yes, some of that is coming through Q2 and Q3, as well.

Okay.

Thanks, Cedar. We'll take the next question from Tony, at Cowen, please.

I've got two questions here. First, it was very encouraging to hear your comments about the destock in the US coming to an end, but you also sounded a cautionary note on US manufacturing. So, I was wondering if you could elaborate there?

And secondly, a question about mining North America. It's unclear to us where SR Minnesota, where that progress stands today. But if need be, would you guys be able to let your contracts with Cliffs expire and source your iron ore needs from your Canadian mining ops? And I guess, along with that, if you could indicate to us what you think your delivered costs might be to your mills in the Great Lakes? And then, I guess if you've begun any early discussions with Cliffs at this point?

I know it's a lot, but appreciate any thoughts on these.

I think, Tony, the one market that is somewhat important to us -- maybe less than to some other folks or less than to the industry as a whole -- that is a concern is, of course, energy. That's actually a bigger market for us in Canada, and we're a big player in the construction market in Canada. And actually, the weak energy market in the western part of Canada is affecting construction there, as well.

But I think, in general, in manufacturing we're still seeing from our customer base relatively good demand. Again, automotive is by far our biggest, most important market, about 35%, or so, of shipments in North America. And that, I think, is continuing to go great guns, and we're actually continuing to grow share in that market.

So, certainly there's concerns about the strong dollar and what that does to the manufacturing sector and then competition in traded goods. There's concern about some of the most recent macro statistics for the US economy, but I think we're seeing still good performance and good demand from our OEM customers, with the exception of the energy sector. And even within energy, most of our sales, actually, are in to tank cars, line pipe -- more energy distribution, which I think continues to be relatively good.

On the mining, it's very difficult, I think, for us to comment on specific supplier relationships, and so on. I think we have an arrangement with SR. Our understanding is that that project is progressing, and we're monitoring that. But again, that's something for them to pursue. And we do have some commitments on their part about when they will be able to provide material to us.

You mentioned about will the contracts with Cliff end? Well, of course, they'll end. I think we now have volume contracts. We adapted one contract that had ended in 2015 and really is kind of a joint venture, if you will. We have an equity stake in what's called the Empire Mine. We have extended that to go to the end of 2016, to be coterminous with the larger contract we have with Cliffs.

And I think we're always aware that this is a situation that needs to be discussed. And so, we continue to discuss that with them. We're still a ways off. So, it's maybe not so urgent.

And I think we would always -- if the necessity was there for whatever reasons, we always have the option to bring material in from Quebec. Now, it's an opportunity cost for us, because we could be selling that elsewhere. But if that was the best answer for the Company as a whole, it's something we can explore.

The logistics are a little bit problematic, depending on where you're going to. And typically, the logistics costs to our Cleveland facility, it's kind of a coin toss between bringing material from Minnesota versus bringing material from Quebec. But to the plants in the Chicago area, then there's a logistics penalty to have to bring stuff in from Quebec versus from Minnesota or Michigan.

Thanks, Lou.

Great. We'll take the next question from Philip, at ABN AMRO, please.

I have actually one question left. That's on the CapEx. You reduced, lowered the guidance. I was just wondering if you could give a split of the part that's caused by the foreign exchange and the part that is caused by postponement of some projects?

And as a follow-up on that, could you also explain whether that is driven by that you're seeing less demand in certain markets that you've been postponing CapEx, or that it's balance sheet driven? And how much more flexibility do you have, going forward, to postpone projects?

CapEx reduction is about $400 million. Roughly half is FX. And when I say "FX," what I mean is we have a euro budget for CapEx for 2015, a Brazilian real budget for 2015. And these segments are honoring the local currency budget.

Yes.

The other half is primarily mining projects that have been postponed or put on hold. So, it's not really impacting the steel business as much as it is on the mining side.

Okay. Okay. Clear. And maybe just on -- I don't know -- maybe on the steel business itself, are there any projects that you still have flexibility to postpone or to put them on hold if the market does deteriorate further than you actually expected? I could imagine, for example, Brazil where there are concerns still on the growth?

Philip, if you look at the $3 billion number, there is not that much growth CapEx going in, finally.

Okay.

So, Brazil, we had not restarted the upstream in Monlevade. There is no short-term plans to restart that, either.

And the remaining growth CapEx that's going in on steel is primarily in Argentina, where there's a very strong business case. It's cost driven, as well -- primarily cost driven to upgrade our finishing facilities.

And the other aspect is more or less what we call franchise businesses. So, this is to maintain and safeguard our quality capability. The biggest driver of that is automotive. And as the demands continue to increase for even more lightweight steel, we are upgrading some of our finishing equipment to make sure we can supply that demand.

So, apart from that, there's not really any other growth CapEx that is occurring in the steel business.

Okay. Clear. Understood.

Thanks, Philip. We'll take the next question from Luc, at Exane, please.

Most of my questions have been answered. I would still have one, however, with regard to Brazil. I know you touched upon already on that. But willing to have a bit more clarity as to how you would expect profitability to evolve here, going into the next quarter, in kind of similar comments you made on other divisions?

I think obviously we've talked about some much stronger headwinds in Brazil and downgrades to the projections. Again, all the, kind of, macro fronts. Again, I think part of that at least is kind of, let's say, fiscal medicine that's being established to put the economy on a sounder footing. Hopefully, that bears some fruits towards the end of this year, into next year. But it's a tougher environment than what we even expected as we put our business plan together.

I think we do have the advantage in Brazil of, as we've talked about many times, a very extensive and well-established distribution network, downstream value-added processing, et cetera. And I think that's helping us maintain a relatively strong position there and to have relatively stable profitability in that business, despite those headwinds.

I think as time wears on, though, that that becomes an increasingly challenging balancing act to get there.

We have a few -- with the real weakening, but actually it's been relative volatile the last few weeks. So, it has strengthened a bit again. It is difficult for us to -- even as we've increased real prices to some degree in the first part of the year, particularly in the long side of the business, you don't see that showing up when you translate into dollars.

That's one of the headwinds. Certainly, we're helped by the exchange rate on the cost side. But it's difficult with the headwinds to get the full EBITDA recognition in dollars, given that you'd have to push the prices up to get there. And obviously, we're looking to be -- need to be competitive with imports in that market, as in every other market.

So, I think that's the major challenge. We're continuing to look at ways very actively to get our costs down. We're moving into more -- from construction, for example, in our long product business, which is the more challenged market segment, into industry applications, which has a little bit opportunity for us, and stuff.

So, we're really working hard to optimize. We've got a good team there that's able to do that. But again, the macro environment is quite a challenging one.

The other point I'd make that's important about Brazil is that -- and it's particularly on the flat side -- for the whole business, somewhere around 35%, or so, of our production is exported, and those are all dollar denominated. You don't have the dollar translation impact there.

But that's been a very difficult market, particularly on the slab business, in the first half of the year. Pressure from the political developments in Russia. I think we're seeing some prospects for that to improve in this second half, and a better realization in export markets where we're quite cost competitive now in Brazil. I think that's a potential upside maybe to offset some of the pressures in the domestic market there.

But through Q1, I think the team there has done an excellent job of dealing with those headwinds and still, if you look just at the domestic market, providing still good returns, particularly given what they're up against.

Thank you.

Great. We'll take the next question from Rochus, at Kepler, please.

Just a few points left from my side. Maybe another way to look at the guidance, I guess, Aditya, you talked about the assumptions for the low end of the guidance range. If we consider that the second quarter is probably not really getting better compared to the first quarter, based on the realization of the lower steel prices, then it appears that you have to make up for more than 50% of the $6 billion guidance floor in the second half. And this is happening against a weaker seasonality in Europe.

So, on a regional basis, what are the drivers to have potentially sequentially better EBITDA realization in the second half, to get to the $6 billion? That will be the first question.

Then, just a follow-up to the previous Brazilian question. I guess with the restart of the third furnace, I think that your production expectations have been previously pretty high. And I think expectations were in the direction of, like, 7 million tonnes. Is that still valid in the light of the margin realization you have in the international export markets?

And then, on the volume guidance, I guess you've taken that down from 4% to 5% to 3% to 5%. What are the specific regional adjustments where you are getting on your product portfolio a little bit more careful?

And finally, on ForEx, can you give us a sense what the ForEx effect was on your network and capital movements?

That's it from my side.

Okay. A lot of questions. I'm going to try and go through some of them, and then I'll get Lou to talk about Tubarao and 7 million tonnes and our competitiveness [in the] export markets.

In terms of guidance, I think first of all, if you look at Q1, you add back the onerous contract charge, and you do $1.44 billion multiplied by four, you get roughly $5.8 billion. So, very close to the bottom end of our guidance range.

In terms of sequentially what happens in the second half versus the first half, let me talk about Europe again. I think in Europe, I think the key point is that volumes have gone up quite a lot, but we don't see that margin benefit because we don't have the impact of lower cost of raw materials through the inventory. So, there's no margin benefit, actually. The impact of the increase in volumes is eaten up by a negative price-cost squeeze.

Now, as we go through the year, there is the possibility of margin expansion if prices remain where they are and we get the full benefit of lower-cost raw materials. So, that clearly is a cost reduction aspect that we spoke about earlier, in terms of what needs to be achieved.

In terms of other sequential effects, we went through NAFTA, where we talked about the fact that the destock is over, lead times are improving, the level of imports also showing some data the level of imports is declining. So, we expect NAFTA volumes to do better.

We also expect Calvert volumes to do better in second half versus the first half.

And then, we talked about ACIS, where ACIS has seasonally lower volumes in Q1 and we expect volumes to increase in ACIS.

We talked a lot about mining, but in mining, clearly, we're making progress in terms of our cost reduction. So, that will have some impact in the second half versus the first half.

In terms of ForEx effect, what was the question on ForEx? Oh, the working capital. The working capital ForEx effect is very similar to the working capital investment in ForEx. So, it's about -- $1.2 billion is the ForEx impact on working capital.

Lou, do you want to go through the Brazil Tubarao?

I think at Tubarao, we're very comfortable with the 7 million tonne figure. There's no market constraint connected with that. Knock on wood. We have good equipment reliability, and so on. But again, I think we're seeing very good results there, good performance, good costs, et cetera.

And I think with the quality of that facility, with the depreciation of the real, with the full volume going through the plant and the related fixed cost absorption, there's a lot of positives for the cost position of that facility. So, even with the current slab environment, we're EBITDA positive with the slab sales that we make.

And I think, looking forward, as I mentioned, I think you have a couple potential positives in the market, with the ruble appreciation from the extreme collapse that we saw in the first quarter, as well as some inflation in the Russian economy that should support higher prices in that product coming out of that region.

I think the recent movement in iron ore, even if it's not sustained, it does tend to change the psychology in the buying community a little bit.

And as Aditya mentioned, we'll have more volume -- we expect more volume at Calvert, as you see the customers start to come back in the US. And Tubarao is certainly one of the customers, one of the outlets for it, as Calvert ramps up its capacity.

So, I think we have no doubts or concerns about the 7 million tonnes, and I say even at very weak Q2 slab prices, we're still right around break even. But we're not into contribution margin land there. So, the cost structure is very, very good there.

Okay. That's very helpful. Just for clarification on this working capital question, I guess the increase in working capital was $1.2 billion. So, that was --? Did I get that correct that that was all driven by ForEx?

No. The cash investment in working capital is $1.2 billion. You don't see that in the balance sheet, because there is a reduction in the dollar value of ForEx by roughly $1.2 billion, as well. And the reason is because we have a lot of euro-denominated working capital. We have a lot of Brazilian real-denominated working capital, as well as Canadian dollar. And as those currencies have depreciated, their working capital translated into US dollars is worth less.

Is that clear?

Okay. Got it.

Sure.

Great. So, we are running short of time now, but we'll very quickly move to Phil Gibbs, at KeyBanc Capital Markets.

Aditya, on the first quarter, if you add back that inventory write-down -- assume it's about $100 million -- that would get you to about $40 a metric ton in profitability, when you also add back that contract hit. Are you suggesting that the second quarter will be at that $40 a ton level? Or, be below that level? I was just not sure about that.

That's a very specific question and, unfortunately, I can't give you a response. I can just repeat what I said, and I think you got all the points I said earlier. But we expect NAFTA EBITDA to be better than Q1. And when I say "Q1," I mean it on an underlying basis, which is roughly $122 million. So, I expect it to do better than the Q1 number.

Than the reported number.

Reported plus the onerous contract charge.

Okay.

Underlying number is about $122 million. And so, I expect it to better than $122 million.

All right. Perfect. And then, just one more, just on the Chinese macro, if I could? From your perspective, are you thinking that the Chinese stimulus that's going through right now is merely going to support a flattish consumption forecast for 2015? Meaning, do they need that stimulus to basically maintain the status quo?

Our forecasts for China show virtually zero to slightly negative real steel consumption growth rate. So, there is an apparent growth, but that's primarily because in 2014 we had negative apparent growth, as there was inventory destocking in China.

And on construction, we're still expecting a negative year-on-year change in output. So, roughly about 3% down in construction.

The way we get to a flat growth of steel demand in China is because auto is still doing well. Auto, we still expect growth. And same in the machinery segment in China.

Thanks.

Great. We'll move to Brett, at Jefferies, please.

It's a question you guys get often, but the aluminum flat-rolled story seems to be talking about sequential -- I don't know -- 30% CAGRs in terms of their market share and that sort of thing. Can you give some examples of what you're doing in the latest round of this battle and talk maybe about an example of where someone could have gone to aluminum and instead stayed back with steel?

I think we really would prefer that our automotive customers are the ones making those claims and talking about that. I think as you know, the major battlefield, the most obvious battlefield, here is in the pickup truck region, with the announcement of the aluminum-intensive F150.

I think we have mobilized more or less the whole Company to say this is something we have to -- we've been working on it already -- but this is something we really have to redouble our efforts to attack and working with Ford, for that matter, but also with other OEMS, particularly in that particular vehicle segment.

And I think we've been pleased with the kind of reception that we've had. I think part of the reception is that we've been able to bring in our materials science capabilities to bear, even to help implement design decisions or to illustrate some design alternatives or options that would achieve what we've proven, I'd say, even with existing products, much less ones that are under development and likely to be commercialized soon -- is a 23% reduction in pickup weight per standard vehicle.

So, again, I think it's up to other customers to announce the impact and the benefits for us of those kind of efforts, but I think if you -- I don't know if you're calling from the States -- but if you read between the lines of the commercials for the light trucks, I think that there's a lot of steel being mentioned in the products being offered by the other OEMS, OEMS other than Ford.

In terms of specific products, I'd say the one that's kind of the most, highest profile for us is if you look at the door ring that we developed jointly with Honda and with Magna. This is a part that I think was clearly being heavily promoted by the aluminum sector.

This is a very sophisticated concept that combines both our advanced high-strength steels, particularly the press-hardenable steels, as well as proprietary laser welding techniques that allows a very substantial reduction in weight as well as an interesting design concept that I think now is first pioneered by Honda. It's won a lot of awards in the automotive industry, and I think is potentially on the way to becoming a standard in terms of door design.

So, that's probably the most salient example, but I think there's many others of companies and even designers at major OEMs that talk about seeing no need to consider materials other than steel, in large part because of the progress we've been able to make and continue to make in introducing new weight-saving products.

Thanks, guys.

I think even though -- that's a very brief overview of the update on auto and all our efforts there. I think now is a good time to flag, for those who are not aware, that we are having a specific event on the 3rd and 4th of June to address this topic -- R&D and specifically what we're doing in automotive product development, how we're working with our customers in providing solutions.

So, that is coming up on the 3rd of June, followed by a site visit on the 4th to actually see these products in process. So, for those who are not aware of that trip, do get in contact with us and we can give you the details.

We are running out of time now. So, we've got time for one more question, which we will take from Charles, at Bradford Research, please.

I don't know if you saw those comments made by U.S. Steel's CEO, but he's claiming that without tariffs on Chinese steel the American steel industry won't survive. Given they haven't even filed their case yet, presumably you might have a different feeling? Or, if it's similar, what kind of tariff are you talking about?

I think it's very difficult for us to comment on what competitors have said. I think I wouldn't want to challenge that. I'm not familiar with the exact quote.

I think we're all very concerned about the surge in imports, and I think a lot of it, particularly, you look at the phenomenal volumes coming out of China. Aditya mentioned already in January 120 million tonne annual rate. This is a huge challenge and issue for the US industry, but even for the entire global industry.

So, I think we would certainly support initiatives to say that needs to be done on a fair basis, and the kind of surge that we're seeing, the economics of that material, and so on is inappropriate. Whether it means the total collapse of the western world as we know it, that's a bit --. I don't think -- at least I wouldn't want to go that far.

Thank you.

Okay. Thank you, everyone, for participating in this call and look forward to be talking to you for the next quarter's call.